The has procedures to monitor and limit the company’s

The risk associated with doing business with another
party who may be unable to fulfill its side of the obligation and will ultimately
default is known as Counterparty risk. In exploring our three companies we will
soon see why counterparty risk can be a big risk for them. Our three companies
are large in capacity and the counterparty risk that they face revolves around:
trade, vendor non-trade receivables and long-term prepayments.

AAPL Counterparty Risk

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Till date AAPL has not realized any significant losses
on its cash, cash equivalents and marketable securities, but, there is always
the risk that future fluctuations in their value could result in significant
losses. From the company’s 10K we see that the company’s credit ratings and
pricing of its investments can be negatively affected by: liquidity, credit
deterioration, financial results, economic risk, political risk and sovereign
risk. The company’s 10K shows that AAPL’s exposure to credit risk on its trade
receivables is higher in certain international markets and APPL’s ability to
mitigate the risks is confined. The company is also exposed to credit risk on
its trade accounts receivable and vendor non-trade receivables related to its long-term
supply agreements. The company’s 10K shows that trade receivables as of
September 2017, in which AAPL had two customers that individually represented
10% or more of total trade receivables, each of which accounted for 10%. On the
vendor non-trade receivables side on September 2017, AAPL had three vendors,
which accounted for 42%, 19% and 10% showing that the vendors individually
represented 10% or more of total vendor non-trade receivables.

In terms of managing the counterparty risk the
company’s 10K confirms that AAPL has procedures to monitor and limit the
company’s exposure to credit risk on its trade and vendor non-trade
receivables, as well as long-term prepayments. In certain instances AAPL
requires its vendors to provide with a collateral to limit the credit risk. The
10K also shows that the company enters into master netting arrangements. The master
netting arrangements are designed to reduce credit risk by allowing net
settlement of transactions with the same counterparty. Now let’s understand
what a master netting arrangement is. A master netting arrangement is a master contract
between two counterparties that have multiple derivative contracts opened with
each other. In an event of default or on termination of any one contact, the
master agreement provides for the net settlement of all contracts which are
opened between the two counterparties, as well as cash collateral, through a
single payment, in a single currency. We also see that the net cash collateral
received by AAPL pertaining to derivative instruments under its collateral
security arrangements as of September, 2017 and September, 2016 was $35 million
and $163 million, respectively. Further the 10K also provides information that AAPL
limits the company’s credit risk on trade receivables with credit insurance for
certain customers, requiring third-party financing, loans or leases to support
credit exposure.